Index-Insurance: Should Policy Makers target Financial Inclusion as a Climate Change Adaptation Strategy for Bangladesh’s rural Poor?

The residents of Khulna and Barisal Divisions, in Southern Bangladesh, are some of the most resilient in the world. Cyclones, storm surges, salinization, rising sea level, flood and erosion threaten livelihoods, health and the broader development agenda of the region. NGOs here aim to provide knowledge, skills and opportunities to people living with climate change impacts, to secure more resilient and independent livelihoods in the face of growing climate risk. Risk transfer models, including index based insurance – where indemnity pay-out following a catastrophic event is decoupled from actual experienced loss and instead correlated to a proxy variable – are increasingly talked about with these people in mind as it is cheap, simple and provides rapid liquidity. Such an approach has seen positive results in other countries, but it remains to be seen if it could improve the lives of Bangladesh’s rural poor; people who operate outside of conventional finance and in one of the most complicated and unpredictable environments on earth.
WorldFish is an NGO working at the village level to help households manage climate risk; real and perceived. Their Changing Landscapes programme – which includes indigenous knowledge and practice as well as idea’s from the scientists – sees the digging of gher levees and sorghums; and the use of gunny bags and vertical agriculture to deal with the issues of salinity, waterlogging and erosion. There are numerous innovations seeking to improve aquaculture yields in paddy fields, from large scale dug out embankment fish traps, to concrete fish rings where river fish can survive low water levels, and so spawn and survive during drought conditions. These ‘climate smart villages’ are having some success, and villagers are passionately engaged with the NGO’s project officers who visit and monitor progress on a weekly basis.
All of these are productive and useful stand alone innovations, but I made the long boat trip south to see if these farmers and fishermen – capably managing climate risk – could benefit from transferring a portion of that risk away from them. The threat of a catastrophic event looms large over decision makers, who are often understandably reluctant to invest in the agricultural inputs necessary to achieve the yield potential in their land. Thai prawn farms routinely yield 10 times as much per hectare as those in Southern Bangladesh because their risk is removed. They invest more and they reap the rewards in good years, safe in the knowledge that they are covered in the event of a bad year. On the face of it, risk transfer could liberate Bangladeshi farmers and drastically improve livelihoods. But is financial inclusion the answer for these farmers?

Villagers need little incentive to take up low-cost and simple interventions, such as the use of gunny bags to reduce waterlogging. WorldFish staff set demonstrations so that the difference in productivity can be seen over the course of a growing season. Encouraging farmers to invest in micro-insurance is much harder. A degree of literacy is required to understand the proposition, and the policy would most likely interest a wealthier farmer with greater capacity to invest. A large number of the villagers I met have no land, and are wage labourers and sharecroppers. It is difficult to envisage that these people would assume the full cost of a premium and only reap a fraction of the rewards? Villagers near Pirojpur had collectively invested in a large fish trap – a square of embankments with an opening that fills with water and river fish as the river floods at the start of the monsoon, to be blocked once stocked with fish. An estimated fivefold annual return on the initial investment suggest that this is an innovation worth replicating, albeit one that would be washed away in the event of a weather catastrophe. If index insurance can promote this type of community investment then policy makers should be promoting index insurance.
There are some clear cases where risk transfer might foster productive risk taking and improve livelihoods in the villages I visited, but it is hard to envisage that these benefits would be pursued, or realised widely by anybody other than a landowner. If a risk transfer model is to be championed as a technique for social resilience then it must work for the poorest, and currently there is insufficient market segmentation and product diversification to meet their needs. A conduit body could pay the premiums of the poor which would serve as an extra layer of social security, or could simply subsidise the premiums to a point where even the poorest farmers can’t refuse, but micro-insurance is often heralded as a means of reducing reliance on aid finance, and frankly, the money might be better spent elsewhere. Similarly, using ex post disaster funding to fund premiums would divert much-needed funds away from the poorest people (who rely most on aid) and towards relatively the affluent (those most likely to buy insurance). Perhaps an ideal solution would be for premiums in LDCs to be paid for by the developed nations and corporations responsible for the climate threats being experienced by the rural poor.
There is a compelling logic in index insurance, and for financial inclusion for the Global South more generally, but there is a hidden threat. Farmers are encouraged to alter their perception of risk, and their coping mechanisms. They may alter their cropping and seasonal patterns. Reduced environmental vulnerability would be coupled with a new exposure to global market risk, as people become financial consumers as well as agricultural producers. Social and developmental goals sit uneasily with market expansion in this ‘democratization of risk’. They coexist within the CSR remit of the large insurers and reinsurers, which drive this agenda as they seek access to new markets. However, an actuarially sound market based contract should not result in an overall redistribution of wealth from the insurer to the policyholder, so the model is of no social value unless the removal of risk generates income that is distributed widely with tangible social benefit. These issues must be addressed further before insurance is promoted ahead of the simple (and excellent) interventions that I saw in the South with WorldFish.

Written by: Jonathan Barnes, Visiting Researcher, ICCCAD August Newsletter 2014